How to Budget

April 20, 2020

How to Budget Your Money in 6 Steps (When You Suck at Budgeting)

By Priya

April 20, 2020

Budgeting is the foundation of any good financial plan. If you want lasting financial freedom and independence, then you need to learn how to budget your money correctly. It creates a plan for your money that helps you make better financial decisions. But budgeting doesn’t have to be difficult or complicated. And it doesn’t matter if you’re not great with numbers or good at maths. Even if you think you suck at budgeting, you can start a simple and effective budget in 6 easy steps.

No one is perfect. And their budgets aren’t either. I’ve been budgeting for most of my life and I still get it wrong sometimes. Please don’t feel too disheartened if you get it wrong. Keep trying and adjusting your budget every month until it really starts to work for your life and your goals.

1. Determine your net monthly income

Your budget always starts with your income. First, you earn money and then you tell your income what to do through your budget. Make a list of all the paycheques/paychecks you’ll be receiving during the month.

There are two super important things to note here:

  1. only include the net income you’ll receive in your bank account; and
  2. be sure to only include the minimum income you’re guaranteed to receive

Net income

For many of us, our employers deduct our income taxes from the money we earn. This is paid directly to the tax office – you never see it. As such, it’s important to exclude these amounts when you’re budgeting your income and only include the money you’ll receive.

Similarly, your employer may also contribute a portion of your income to your superannuation or retirement funds on your behalf. This is your money, but it won’t be paid into your bank account. These contributions must also be excluded from the amount of income you budget for.

Minimum guaranteed income

Another key component to budgeting your income correctly is to budget only for the minimum amount of money you’ll be paid. This is especially important if your income fluctuates from month to month. For example, you might be paid an hourly rate that fluctuates depending on how many hours you work. Or you might earn a commission based on the sales you bring in.

If your income fluctuates, you need to be careful not to budget with money that you won’t actually earn. Therefore, you should only be budgeting for the minimum income you’re guaranteed to receive.

Read more: 6 Reasons Why You Can’t Stick to a Budget

Example: Budgeting your income

In the example below, Betty earns two paycheques per month. One is a fixed amount of $2,000 on the 1st and the other is a commission based on the sales she brings in. Her commission for this month is $2,200 on the 20th. Both of these amounts are what Betty receives in her bank account after her employer has taken out tax and retirement contributions.

PaychequeAmount
Fixed – 1st$2,000
Commission – 20th$2,200
Minimum Net Monthly Income$4,200

Betty’s commissions usually fluctuate from month to month, however, over the past 12 months she’s always earned at least $2,200 in commissions. Her fixed paycheque is something she receives every month that doesn’t change. As such, Betty is budgeting only with the minimum income she’s guaranteed to receive.

2. Record all your bills & fixed expenses

After you’ve listed your income, it’s time to turn to your bills and fixed expenses. These are generally expenses which are a fixed amount each month and don’t really fluctuate. They’re often also due on a set date.

Make a list of all your bills and fixed expenses. Be sure to include the following:

  • what the bill is for / who the bill is due to;
  • the amount that is due;
  • the date the bill is due or paid (whichever comes first).

Read more: 7 Budgeting Myths You May Be Falling For

The date your bills are paid

It’s important to know when your bills are due to avoid being late and risking your services being cut. However, the date your bills are due is not necessarily the date they will be paid. For example, I like to pay my bills at least a few days before they’re due. I do this because I want the transactions to clear my bank account before the due date.

Therefore, if you pay any of your bills before they’re due, you need to budget based on the date the bills are paid. A key part of budgeting is learning to manage your cashflow – money in versus money out. You don’t want money going out before it’s come in, otherwise, you’re spending money you don’t have.

The best way to manage your cashflow is by using a budget calendar. When you’re budgeting your bills based on the date they’ll be paid, you’re budgeting based on when the money will actually leave your bank account. Based on the date the bill will be paid, determine which paycheque it will be paid from. You don’t want to assign a bill to a certain paycheque before you’ve received that income.

Read more: How to Use a Budget Calendar to Organise Your Finances

Be sure to review your bank statements to ensure you’re capturing all your bills. This is especially important for bills that aren’t paid monthly, for example, quarterly or annual bills.

Example: Budgeting your fixed bills & expenses

Below is a list of Betty’s bills & fixed expenses. She makes her rent and debt payments a day early, so instead of writing the due date, she’s writing the date she’ll pay the bill.

Bill / Expense Due Date Amount
Rent3rd$1,500
Utilities10th$200
Debt Payments20th$350
Insurance25th$80
Netflix28th$12
Total $2,142

Since Betty gets paid on the 1st and 20th, she’ll be paying her rent and utility bills with her first paycheque (the paycheque she receives on the 1st). Her debt payments, insurance bill and Netflix subscriptions will be paid with the paycheque she receives on the 20th.

3. Set a budget for all your variable expenses

The third step is to look at your variable expenses. These are expenses that tend to fluctuate from month to month, for example, groceries and fuel. As a result, these costs may be a little harder to predict but they’re easier to control. The amount you spend in these areas is often heavily influenced by your behaviour.

For example, you can change your shopping habits to try and save money on groceries, however, your rent bill doesn’t change. You don’t have control over how much rent you pay but you have some control over your grocery spend.

Determining your budget categories

You will need to set a budget for all of your variable expense categories. If you don’t know what the are, follow these 5 steps to determine your budget categories. It involves looking through your bank statement to see where you’re spending your money.

Read more: How to Determine Your Budget Categories in 5 Simple Steps

Your budget categories should be unique to you and your life. However, here are some common budget categories to help you get started:

  • groceries
  • eating out
  • shopping / spending money
  • fuel & parking
  • health & medicine
  • beauty & personal care
  • clothing
  • household

How much money should you budget for your variable expenses?

The best indicator of how much you’ll realistically spend in your variable expense categories is how much you’ve spent in the past. Review your bank statements from the last three months and add up how much you’re spending in each of your variable expense categories each month.

I recommend budgeting for the same amount that you spent last month because that’s the best indicator of your most recent behaviour and decision-making. However, if you notice that your spend last month was significantly higher or lower than the two months before it, take an average of the three months instead.

Read more: How to Meal Plan on a Budget

To calculate an average, add up how much you’re spending in each category for each of the three months. Then, for each category, add the total of the three months together and divide by 3 (the number of months).

Example: Budgeting your variable expenses

For example, Betty spent $500 on groceries in May, $400 in June and $450 in July. Her average grocery spend is then $450 per month ($500 + $400 + $450 = $1,350 then $1,350 / 3 = $450).

ExpenseMayJuneJulyTotal
Groceries$500$400$450$1,350
Average Spend$450

Betty has reviewed the average spend for all her variable expense categories. Below is an example of what her budget looks like:

CategoryAmount
Groceries$450
Fuel$300
Eating Out$350
Total$1,100

4. Allocate money in your budget towards your financial goals

By now, you’ve budgeted your income and all your expenses. However, if you’re chasing lasting financial freedom and independence, you need to take it a step further. First, we need to see how much money is left in your budget after you’ve taken care of all your expenses. This is done by subtracting your total bills and total variable expenses from your total income. When you do this, you’ll either have a negative or a positive figure.

Below is what this would look like for Betty:

ItemAmount
Total Income$4,200
Minus: Total Bills & Fixed Expenses-$2,142
Minus: Total Variable Expenses-$1,100
Leftover$958

Your expenses exceed your income

A negative figure means your expenses exceed your income – you’re spending more than you earn. You’re likely dipping into any savings you have or using debt to make ends meet. Continuing on this path will destroy your wealth and amass more debt.

This is really dangerous territory. You’ll need to work hard to reverse this as soon as possible. You only have two options here:

  1. reduce your expenses; or
  2. increase your income.

Cutting your expenses

I strongly recommend starting with cutting your expenses since it’s generally easier than earning more income. Start by cutting out all non-essential expenses. This includes things like Netflix and other subscriptions, salon appointments and eating out. There are many ways to cut expenses altogether or substitute them for something else.

This is an area that a lot of people struggle with because nobody likes making sacrifices. But here’s the truth: there’s nothing in this life, including financial freedom and independence that comes without sacrifice. You might need to sacrifice some luxuries and comforts in the short term to make your long term goals a reality.

Read more: 6 Massive Budgeting Mistakes You Need to Avoid

Increasing your income

Once you’ve cut all expenses that you possibly can, redo the total income minus total bills & expenses calculation. If you’re still spending more than you earn then the only other option is to increase your income. This is not always easy to do and it may take some time before you see any extra money in your budget. Below are some tips to help you get started:

  • Sell any unused items around your home;
  • Start a part-time job on weekends or after you finish your full-time work;
  • Ask for extra shifts or increase your hours;
  • Earn a promotion or pay rise at your current job;
  • Make something you can sell online;
  • Look for a new job which has a higher pay;
  • Learn a new skill that will help you earn a pay rise or find a higher paying job.
Expert Tip

Lasting increases vs one off increases

You’ll notice from the list above that some of the ways to increase your income will result in lasting changes. Your income will be increased in the future as well. However, there are some (like selling items around your home) that will only give you a one-off increase. If you’re spending more than you earn and you’ve cut all possible spending, you’ll need to focus on increasing your long term income. One-off increases are okay for the short term, but they’re not a long term solution.

Your income exceeds your expenses

If you have a positive figure after subtracting your expenses from your income then you’re spending less than you earn. This means you have some money leftover in your budget. This is good! This is exactly what you should be aiming for. The question I often get, however, is what you should do with the money leftover in your budget.

The answer depends on your financial goals and where you are on your journey to financial independence. Extra money in your budget should be allocated to your financial goals in order of which is most important for lasting financial freedom.

Allocate money towards your financial goals

I always recommend that your #1 financial goal and priority should be to build up a fully-funded emergency fund. This is the order in which I recommend my students focus on their financial goals:

  1. Emergency fund (minimum of 3-6 months of expenses, plus a little extra for emergency expenses like car repairs);
  2. Saving up for larger bills & expenses (for example, car maintenance fund, annual insurance premiums, important events like birthdays & Christmas);
  3. Making extra debt repayments to become debt free;
  4. Building wealth through investing.

You can absolutely save for things like Christmas while you’re paying off debt. However, I put saving before becoming debt-free because your ability to save money will help you find more money in your budget to put towards paying off debt.

Going back to our example from before, Betty has $958 remaining in her budget to allocate towards her financial goals. She should budget for this extra money based on where she’s up to on her journey to financial freedom and her financial goals.

5. Track your expenses against your budget

At this stage in the process, you’ve actually completely set your budget! I knew you could do it! But the work isn’t over yet. There’s no point setting a budget if you still don’t know where your money is going or your budget doesn’t actually work in your life.

The next step is to track all your expenses over the next month. This will help you see which areas in your budget need more work. It’ll also show you where your money is actually going, and will highlight the financial consequences of the decisions you make.

At the end of the month, add up all your spending and compare it against your budget for each expense category.

Read more: 5 Ways to Track Your Expenses in Your Budget

6. Review, revise & adjust your budget

The last step is where the true power of your budget comes into play. When you look at your actual spending versus your budget, you should clearly be able to see where you did well and where you exceeded your budget. If you weren’t able to stick to your budget, that’s ok. It’s most likely because your budget for that category was too restrictive.

Reviewing your budget and reflecting on why some things worked and others didn’t is super important. It gives you a chance to continually adjust your budget month after month until your budget truly reflects your life and what your goals are.

If you’ve exceeded your budget, don’t get disheartened. I promise you that it happens to everyone. I’ve been budgeting since I was literally a child and I still get it wrong sometimes. The important thing is that you know what’s going on with your money so you can learn to make better decisions with your budget.


Budgeting doesn’t have to be complicated or difficult. You can easily learn to budget your money in 6 simple steps. Your budget will be the most powerful tool you have in your journey towards lasting financial freedom and independence. It shows you where your money is actually going and allows you to dedicate extra money in your budget towards your financial goals. It’s important to continuously review and adjust your budget to ensure your money is working as hard as it can to make your dreams come true.

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